Atlanta Federal Reserve President Raphael Bostic said this past week his main concern is that the longer inflation remains high, the more likely it is that businesses and workers begin to believe that inflation will not come back down. Then they begin to alter their habits.
Workers are demanding pay increases because they can see their wages aren’t buying as much with so many everyday necessities costing more, including rent. That leads companies to hike prices more, then workers turn around and demand another pay raise. Economists call this phenomenon a “wage-price spiral.” It often leads to sustained high inflation that forces the Fed to step in to stop it. Alternatively, consumers could pull back on spending as they worry about high prices, another scenario that is harmful to the economy and could lead to a recession.
Already, there are signs of a psychological shift starting. Numerous polls and consumer sentiment surveys show inflation has become a top concern for many Americans. And people are predicting inflation will stay high.
“During the past five months consumers have become much more concerned about rising inflation and slower wage growth and their negative impact on their living standards,” the University of Michigan Surveys of Consumers said when releasing its September data. And this week, the New York Fed’s consumer survey showed Americans now predict 4 percent inflation for the next year and 3.4 percent for the next three years — the highest levels since the survey began in 2013.